Keynes and the Current Crisis

This post is part of a month-long discussion on Cato Unbound on John Maynard Keynes.

Tim Congdon covers a lot of ground in his essay on Keynes, Krugman, and the liquidity trap. I will narrow my focus to the current crisis and the relevance of Keynes to the policies being pursued.

First, it is important to focus on an issue where there should really be no grounds for disagreement: the size of the stimulus and its expected impact. Contrary to what Congdon states in his piece, the stimulus was closer to $300 billion a year (@ 2 percent of GDP) in 2009 and 2010, not $800 billion a year. The total stimulus package came in at close to $800 billion. Nearly $100 billion involved a technical fix to the alternative minimum tax, which is done every year and has nothing to do with stimulus. Approximately $100 billion was slated to be spent after 2010 in longer term projects. This leaves $600 billion, or roughly $300 billion to be spent in both calendar years, 2009 and 2010.

The expected impact of the stimulus can be determined by reading what the Obama administration was saying about it at the time. The projections in the paper by Christina Romer and Jared Bernstein, which outlined the original proposal, showed that they expected it to create just 3.7 million jobs. The package that they got through Congress was smaller and less oriented toward spending than their original proposal, so the number of jobs projected would have to be adjusted downward accordingly.